IHT and property

For many people their main asset is property, usually the property they are living in. Sometimes people transfer this property to relatives before their death to try to avoid inheritance tax or because of a fear that they will be forced to sell it in order to pay care home fees.

Local authorities have a right to challenge arrangements designed to avoid payment of fees by giving away property. You may need to take specialist advice on this subject.

From a tax point of view, there are three main issues:

1)      If you give away a property but continue to live in it, this is likely to be a ‘gift with reservation’ (see section above Income Tax and Pre-Owned Assets rules) and so ineffective from an inheritance tax point of view. It will remain in your estate and be taxed on your death.

2)      There is an additional complication here. The person receiving the property may lose capital gains tax private residence relief. This relief is only available where someone owns and occupies a property as their main residence. Unless the person to whom the property has been given comes to live in it, then capital gains tax could be payable by the person receiving the gift when the property is eventually sold

3)      If a more complex arrangement occurs , such as giving the property into trust, or selling it, and giving the money away, but in the knowledge that the recipient of the money will use part of it to buy you a house, then the Pre-Owned Asset rules could come into play. These could impose an income tax charge for your continued occupation of the property, or of a new property acquired with funds you have given away

These are very complex areas and it would be best to take professional advice {link} before making any decisions.

For more information on this subject, see the passing your home on to your children section on the HMRC website at http://www.hmrc.gov.uk/inheritancetax/pass-money-property/pass-home-to-children.htm.